India’s first budget under Prime Minister Narendra Modi′s current government was highly anticipated as the country contends with a slowing economy, depreciating rupee and global macroeconomic headwinds.
The government’s message was subtle, yet clear: the middle-income class has to spend more to boost corporate earnings and spur the economy.
In a one-two punch, India’s Finance Minister Nirmala Sitharaman removed taxes for people with annual earnings of up to 1.2 million Indian rupees ($13,694), up from a previous threshold of 700,000 Indian rupees.
The measure is expected to benefit 10 million more taxpayers with savings that can be channeled towards investing or buying goods and services. This translates to a 1-trillion-Indian-rupee shortfall in annual Treasury revenues.
Consumption levels in India have nearly trebled to 200 trillion Indian rupees in the last decade, alongside a growth in the country’s population to 294.3 million households. The segment now accounts for around 60% of India’s economy — making it the top growth driver.
Upasana Chachra, chief India economist at Morgan Stanley describes consumption as “one of the mainstays of the Indian economy.”
Cracks in consumption
However, the government’s laser focus on boosting consumption — over infrastructure development, on which it has historically concentrated — comes in response to deep cracks in consumer spending.
Excluding the luxury market and segments serving the rural population, consumption levels across sectors has dwindled as India’s city dwellers — who hit 522.9 million as of 2023 — cut back on spending.
Among the factors prompting this are mounting inflation levels and stagnant wages, a recent report from market research consultancy Kantar highlights.
From supermarket chains to automakers, companies have been feeling the pinch. Several of India’s largest corporations, such as Hindustan Unilever
, Maruti Suzuki
and Reliance Retail — the retail arm of Reliance Industries
— reported a slowdown in revenue and weaker earnings last year, on account of languishing urban demand.
The fault lines in household spending also bode poorly for foreign companies vying for a share of India’s much-hyped future growth.
A cyclical slowdown
India’s lull in consumer spending is in part owed to a “cyclical slowdown in consumption,” as households cut back on expenses to either save more or service loans incurred during the post-Covid 19 pandemic spending boom, says Dhiraj Nim, a foreign exchange strategist and economist at ANZ Bank.
